The Joys of Landlording

By: 
Al Jacobs

I’m pleased to introduce myself to you; you’re in the presence of a bona fide landlord. And I did not acquire this impressive status the easy way. As I completed my 9th year in the U.S. Navy, with my ship just returned from a 10-month tour of WestPac, I actually had some cash in hand.

With the exchange rate of the Japanese yen at 360 to the U.S. dollar, but with no real opportunity to spend much of my $222.30 monthly pay, I found myself stateside once again, in possession of about a thousand dollars … and for me, back in 1956, this seemed like a lot of money. And so I remember one day visiting my mother, a real estate agent sitting in an open house in Torrance, California, and asking: “Mom, I’ve got a thousand bucks; what should I do with it?”

She instantaneously replied: “Buy this house I’m sitting in.”

My response: “What for? I’m stationed aboard ship.”

She then said. “I’ll rent it for you and make you some money.”

In November of that year I acquired a 2-bedroom, 1-bath, house for which I paid $10,395. With a down payment of $950 – make it $900, because my mother shared her $100 commission with me – and liability for a couple of trust deed loans (much like mortgage loans), my monthly payments for principal, interest, taxes and insurance came to $90.

As for the rent, a tenant paid $95. As you see, I became a landlord with a potential profit of $5 per month … providing nothing went wrong.

It’s now 64 years later. Since I left the navy in 1963, I’ve worked in a wide variety of jobs. But despite the various activities I’ve engaged in to earn a living, my principal obsession has been landlording. Until the turn of the century my rental investments consisted exclusively of single-family houses.

I employed a simple technique in acquiring them. I selected areas where the existing homes were mostly encumbered with assumable FHA and VA loans, where I merely paid the seller the difference between my purchase price and the unpaid principal balance of their loan.

In the early years my wife and I picked up houses – all in California – for as little as three or four thousand dollars each. By the early 1980s we owned 19 rental houses, and thanks to much maligned inflation, our equity value in the properties proved to be well in excess of the cash amounts we expended in their purchase.

Though we spent considerable time and energy in overseeing the operation, our efforts were satisfactorily rewarded; California was, as advertised, a truly Golden State in which to seek prosperity; obviously officialdom respected enterprise.

During the next couple of decades, we simply tended our rentals as their values drifted upward and rents increased. With spare time on my hands, I returned to school to fulfill a lifelong aspiration. At UC Irvine I earned both Bachelor’s and Master’s Degrees in chemistry and then taught the subject at a community college for ten years.

By the turn of the century a new opportunity presented itself. I met a most impressive young man, John Lee, involved in acquiring and managing apartments. He convinced me these were superior to individual houses as an investment, so over the next six years I systematically disposed of my rental houses as I partnered with him in the acquisition of small to medium-sized apartments. He proved to be a shrewd purchaser and a fine manager; as he predicted, our investments did remarkably well.

Sadly, not everything in life turns out as we might choose. John died in an airplane crash in 2006. Though I’d managed property effectively in the distant past, I no longer considered myself able to take charge.

Luckily, I found a competent manager who’s been handling things effectively for the past 11 years. And up until late-February of this year, our seven apartment complexes, with more than 150 units – all in the lower to middle-income category – performed admirably. We maintain our properties well, treat our tenants with the respect decent tenants deserve and rarely incur a problem.

As I said, up until late-February of 2020 investments generally performed well. Unfortunately, bedlam then descended upon us. Upon arrival of the traditional seasonal virus, dubbed the coronavirus, government authorities declared it to be a near-replica of the bubonic plague pandemic. Our governor ordered the state locked down.

With most citizens relegated to home confinement, millions of workers instantaneously lost their jobs as tens of thousands of businesses closed. Over the following 75 days the state’s budget surplus of $5.6 billion became a deficit of $54.3 billion.

If, in fact, the virus resembled the mid-14th Century Black Plague, the actions taken were probably appropriate. However, research quickly determined it to be mostly innocuous. Findings by Stanford University in the Santa Clara County area, and confirmed by a Los Angeles County survey conducted by the University of Southern California, determined the coronavirus causes no more than mild discomfort for most people. Both studies verified its mortality rate at about one in ten thousand.

Ignoring the realities, state officials began enacting rules, promoted by test-advocating epidemiologists, designed to end the pandemic by slowing the spread of the virus. The problem, of course, is slowing the spread stretches the pandemic. With no logical procedures being followed, the self-contradictory program merely dragged on and on … to the detriment of every Californian needing to make a living.

Let’s now return to landlording. On March 4th of this year, for reasons mostly unwarranted, our governor declared a state of emergency whereby he gave himself the authority to rule California by edict. Shortly thereafter he declared that tenants could no longer be evicted for nonpayment of rent. It’s now nearly a half-year later, and the rule is still in effect. Understandably, an increasing number of tenants, regardless of their financial abilities, are living rent-free as many landlords are facing insolvency.

With the legislature now back in session, several new laws are proposed. Most notable is AB 1436 (Long-term Eviction Relief), which continues to ban evictions until 90 days after the governor voluntarily relinquishes his executive privilege … a most unlikely event … or April of next year.

An eviction normally takes approximately five months between the issuance of a three-day notice to quit to the actual removal under a writ of possession by a deputy sheriff. Thus, the period of time a non-paying occupant can live rent-free – March 2020 to Sept. 2021 – totals 18 months. I cannot think of a less pleasing way to engage in landlording.

While we’re viewing the proposed laws in the hopper, consider AB 828 (Eviction Moratorium/Residential Rent Reductions). This law will mandate an immediate 25% rent reduction for every tenant if a landlord cannot prove the reduction in rent causes a material economic hardship of at least 25%. And just to make certain few if any apartment owners escape the inevitable, the law provides that if the landlord owns 10 or more rental units, the court presumes the landlord will not suffer a material economic hardship.

I can easily imagine what this law will do to the owner of a 12-unit apartment with an 80% mortgage loan on the building. In no time at all, the property’s equity and cash flow will entirely disappear.

A final thought: Although the concept of free rent for the tenant, together with let the landlord go hang, may seem to be a bonanza for the low-income citizen, as well as a crafty electioneering device, the not-too-distant result will prove to be unfavorable.

Landlords will disappear; habitable rental units will cease to exist; and the multitude of the bereft will end up residing in the sort of decrepit structures known as communal apartments which, in an earlier era, housed the impoverished masses of pathetic souls in the Soviet Union. If this is what the authorities intend, then God save us all.

 

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al can be contacted at al@abjacobs.com

 

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